NBU Approves New System of Currency Regulation, Publishes Roadmap of Currency Liberalization

The National Bank of Ukraine (NBU) has published all of the regulations underlying the new liberal currency regulation system as identified by the Law of Ukraine On Currency and Currency Operations. The new currency regulation system, which replaces the previous base of 56 legal acts in the area of currency regulation, consists of eight main resolutions of the NBU Board:

• Resolution 1: On Approval of the Regulation on the Structure of the FX Market of Ukraine and Rules and Procedure for Trading in Foreign Currency and Investment Metals in the FX Market of Ukraine
• Resolution 2: On Approval of the Regulation on the Conduct of Operations With Currency Valuables
• Resolution 3: On Approval of the Regulation on Moving Currency Valuables Across the Border
• Resolution 4:  On Approval of the Regulation on the List of Safeguard Measures, the Procedure for Their Implementation, Extension, and Early Termination
• Resolution 5: On Approval of the Regulation on Safeguards and Procedures for Certain FX Transactions
• Resolution 6: On Approval of the Regulation on the Procedure for the Provision of Information by Banks to the NBU Regarding Agreements Under Which Residents Take Responsibility to Fulfill Debt Obligations to Nonresident Creditors Under Loans Taken out by Residents
• Resolution 7: On Approval of the Regulation on the Procedure for the FX Supervision of Residents’ Compliance with Settlement Deadlines in Goods Export and Import Operations
• Resolution 8: On Approval of the Regulation on the Conduct by Authorized Institutions of the Analysis and Verification of Documents (Information) Related to FX operations.

Resolutions 1–3 are perpetual regulations but will only go into full effect when the NBU has stopped to need to use safeguard measures in the FX market to prevent circumstances threatening to disrupt macrofinancial stability.

Resolutions 4 and 6 are perpetual regulations as well. They identify the general list of potential safeguard measures and criteria for their use in the FX market and stipulate a notification procedure for loan agreements with nonresidents.

Resolution 5 is temporary and identifies specific safeguards introduced by the NBU. These measures will be canceled as macrofinancial conditions improve.

Resolution 7 also identifies a temporary procedure for the FX supervision by banks of compliance with settlement deadlines in goods export and import operations until this requirement is canceled.

Resolution 8 is one of the documents that are critical to the implementation of the risk-oriented approach in FX supervision.

In addition, the NBU Board has approved another two technical documents to implement the requirements of the new FX legislation. One of these is Resolution 10 On Approval of the Rules of Operation of the System of Confirmation of Transactions in the FX Market of Ukraine dated 2 January 2019. The document retains the flexible approaches to the use of the capabilities of the ValCli transaction confirmation system. The NBU has also extended the System’s operating hours from 5:30 p.m. to 7 p.m. to allow banks more time to inform the NBU of the available hryvnia balance in account 2900 (which accumulates customer funds that go to buy foreign currency) and of the amount of FX proceeds planned for required sale the following day.

The NBU has also approved Resolution 16 On the Document for the Accounting and Registration of Currency-Trading Operations dated 4 January 2019, which specifies the form and content of payment documents to conduct currency-trading operations.

The adoption of the above regulations is another important phase of FX market liberalization. Provisions therein stipulated are intended to deregulate investment, ease the conduct of cross-border transactions with currency valuables, and expand the list of available FX operations. The new currency regulation system will start working on 7 February 2019, after the Law of Ukraine On Currency and Currency Operations has gone into effect.

The new regulation introduces a number of measures to ease the conduct of business in the FX market and increase Ukraine’s investment appeal. Overall, the NBU will introduce more than 20 easing measures on 7 February that are intended to:

• double the settlement period for export/import transactions to 365 days
• cancel FX supervision of export/import operations generating less than UAH 150,000
• allow unrestricted use of legal entity accounts abroad (except operations to transfer funds from Ukraine to such accounts)
• cancel individual licenses to conduct FX operations; the licenses will be replaced by a system of e-limits (EUR 2 million a year for legal entities and EUR 50,000 a year for individuals)
• lift sanctions in the form of termination of international economic activity for breach of settlement deadlines
• abolish the restriction on early redemption of external obligations
• allow currency forwards for the purpose of hedging export/import and debt operations
• allow operations using accounts of non-resident legal entities in Ukrainian banks
• cancel the procedure for registration of external borrowings
• allow online purchases of foreign currency by individuals (up to the equivalent of UAH 150,000 per day)
• allow banks to sell FX-denominated government securities to their clients for foreign currency
• allow currency swaps between banks, on the one hand, and residents and nonresidents, on the other hand
• allow banks to invest in investment-grade securities without limitations
• raise the limits on remittances of foreign currency from Ukraine by individuals without opening a bank account, to UAH 150,000 from UAH 15,000 a year
• raise the limit on purchases of investment metals by individuals and legal entities from 3.21 troy ounces (100 grams) a week to an equivalent of UAH 150,000 a day (with no restrictions for legal entities that conduct business involving the use of investment metals)
• allow legal entities to bring investment metals in/out of Ukraine if permitted by their articles of association
• allow resident to make FX payments for life insurance purposes
• allow the use of hryvnia loro accounts in nonresident banks for investments and lending to residents
• allow nonresident banks to buy foreign currency using full amounts of hryvnia loro account balances
• allow purchasing and accumulating foreign currency on accounts intended for making payments on external debt
• cancel double oversight of goods export and import operations: FX supervision will only be conducted by the bank that received information about the relevant customs declaration
• allow investing in Ukraine in currencies that are not only in the first group of the currency classifier but also in the second group
• unify movement of currency valuables across the border.

As part of the new currency regulation system, the NBU is transitioning from the system of sweeping control over each currency operation to FX supervision that operates on the principle “more risk, more scrutiny, less risk, less scrutiny.”

Banks will be able to ease supervision of most business transactions that do not have the attributes of suspect operations (inconsistencies between the amount of an operation and the usual amounts of such operations, gaps between the type of an operation and the nature of the customer’s business, the use of shell companies in settlements, etc.). Also canceled is the requirement that banks compile mandatory written reports on the results of the analysis of a customer’s operation.

Along with exempting from supervision small-scale operations generating less than UAH 150,000 in sales, the implementation of risk-based supervision will reduce the administrative costs of businesses and ease the burden on the financial monitoring departments of banks.

The new currency regulation system leaves it up to the NBU to impose safeguard measures in the area of FX operations in the event of circumstances that threaten to undermine the stability of the financial system. Safeguard measures may include regulation of the required sale of a portion of FX proceeds, control over settlement deadlines in export and import transactions, introduction of limits on certain FX operations, and establishment of rules governing the movement of capital.

At the same time, these rules are only preemptive: no new restrictions are planned for introduction in the FX market on 7 February. The NBU remains committed to its ultimate objective of removing all FX market restrictions and implementing a transition to free movement of capital.

The currency liberalization roadmap prepared by the NBU in conjunction with IMF experts provides for the gradual removal of all FX restrictions as Ukraine’s macroeconomic conditions improve, adoption of a raft of laws to enhance the quality of regulation of the non-bank financial market (Draft Law No. 2413а On the Split), and prevention of unproductive capital outflow from Ukraine (the BEPS-combating Draft Law on the Implementation of the Plan to Counteract Base Erosion and Profit Shifting, which the NBU and the Ministry of Finance published in October).

Thus, the removal of FX restrictions will be preceded first and foremost by the NBU’s estimation of macroeconomic indicators such as GDP growth, inflation developments, FX market conditions, external market conditions, etc. Along with that, currency liberalization, which is part of the roadmap, has no time restrictions. Consequently, the faster that favorable macroeconomic and financial conditions arrive, the faster that the NBU can remove FX market restrictions, and vice versa.

One of the top items on the NBU’s priority list is lifting a number of restrictions that create the most additional hurdles for the conduct of international economic activity and hamper new foreign investment in Ukraine. To eliminate these hurdles, the NBU plans to first accomplish the following:

• gradually lower and abolish requirements for the mandatory sale of FX proceeds
• cancel the requirement to reserve funds for buying foreign currency (buying on T+1 terms)
• lower and/or cancel the limit on repatriation of dividends
• cancel settlement deadlines in goods export and import operations by residents but not before the BEPS counteraction bill is passed
• remove the ban on purchasing foreign currency with borrowed funds
• cancel additional supervision of netting of FX liabilities
• raise and cancel the UAH 150,000 per day limit on purchases of foreign currency cash by individuals 

Other easing measures in the FX market will pertain to the conduct of certain operations, foremost with securities and derivatives, investments abroad, and expansion of capabilities of financial institutions. These include measures to:

• gradually remove all restrictions on the conduct of forward operations
• cancel restrictions on repatriation of proceeds from the sale of bonds and unlisted securities
• remove the requirement that legal entities cannot buy foreign currency without making commitments
• lift all restrictions on FX settlements in deals to purchase or sell domestic government bonds
• cancel all restrictions on currency swaps
• raise and subsequently cancel the limit on investment abroad by individuals (increasing the limit to EUR 2 million a year on 7 February) but not before the BEPS counteraction bill is passed
• raise and subsequently cancel the limit on payments abroad by individuals (increasing the limit to EUR 50,000 a year on 7 February) but not before the BEPS counteraction bill is passed
• cancel the ban on hryvnia lending to nonresidents (but not before the BEPS counteraction bill is passed)
• enable access to the interbank FX market for non-bank financial institutions (no earlier than the “split” bill is passed)
• allow sales of foreign currency online to non-bank financial institutions (no earlier than the “split” bill is passed).

The NBU pursues the ultimate goal of removing all current restrictions and making possible a transition to free movement of capital, a regime that will lay the groundwork for easing the conduct of business, improving the investment climate in Ukraine, attracting foreign capital, and ensuring sustainable economic growth.